Humana's stock ends a three-day selloff, but investors watching its bonds may have had a heads-up
By Ciara Linnane
Spreads on the company's outstanding bonds started to tighten Thursday, and buyers emerged
Humana Inc.'s stock was up 2% Friday after three straight sessions of declines, but investors paying attention to the performance of its bonds on Thursday may have had something of a heads-up on the stock's recovery.
Spreads on the company's outstanding bonds started tightening on Thursday as buyers emerged after several days of strong selling, possibly leading the stock.
Humana's stock sold off and spreads widened sharply after the managed-care company disclosed that one of its key Medicare Advantage plans looks likely to have its government rating cut, which would reduce reimbursement rates.
The Centers for Medicare and Medicaid Services is set to cut the 2025 star rating on Humana's (HUM) H5216 plan, which contains 45% of Humana's Medicare Advantage members. As Mizuho analyst Ann Hynes explained on Wednesday, if the rating cut is officially announced on or about Oct. 10, it would "significantly impact 2026 rebates and quality payments from the government."
The stock is now down 24% in the week to date, and the Wall Street Journal's Heard on the Street column mooted that a tie-up with Cigna Corp. (CI) may look more palatable today than it did when Cigna walked away from talks last year.
That's because the two stocks have diverged sharply, with Humana's market cap shrinking to about $29 billion from about $60 billion a year ago, while Cigna's market cap has swelled to about $95 billion from about $80 billion a year ago.
Cigna specializes in commercial insurance, which has spared it the headwinds Humana is facing in the Medicare business.
Last year, there were concerns and expectations that a combination of the two companies would face regulatory pushback. But Cigna could now argue that a deal would create balance in the sector by creating a bigger rival for UnitedHealth Group Inc. (UNH), the nation's largest insurer, as the Wall Street Journal suggested.
And while it's unlikely the two will race to resume talks, Wall Street is considering a future deal. Investors "believe this is a possible outcome, but doubt a move will take place until the dust settles a bit more for Humana specifically," Mizuho strategist Jared Holz said in the Journal column.
The following charts from data-solutions provider BondCliQ Media Services illustrate the movement in Humana's bonds, which carry a BBB rating from S&P Global Ratings, placing them in the investment-grade category. Cigna's credit rating is two notches above, at A-.
Prices also started to stabilize after falling earlier in the week.
The next chart shows the emergence of buyers late Thursday.
Humana has more than $13 billion in outstanding bonds, according to FactSet, the bulk of which will mature in 2028.
Humana's stock is down 46% in the year to date, while the S&P 500 SPX has gained 19.7%.
-Ciara Linnane
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10-04-24 1213ET
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